The interest rate cut - it is not if but when and by how much

Inflation data comes out a few days later. The numbers could be very troublesome for the Fed. The headline CPI could be has high as 4 percent.

Accelerating inflation and the Fed is cutting rates; talk about policy incoherence.

Market WeekHow Much of a Rate Cut?

PERSISTENT worries about the financial system have led many traders to stop questioning whether the Federal Reserve will cut interest rates again this week and to ask instead how big the cut will be. A Bloomberg News poll of economists forecasts a quarter of a percentage point. Prices of futures contracts tied to the benchmark federal funds rate show heavy betting on a half-point move.

Komal Sri-Kumar, chief global strategist at the TCW Group, a Los Angeles fund management firm, expects a quarter-point cut when Fed policy makers meet Tuesday. That would be best for the economy and stock prices, he says. “If there is no change, then the stock market tumbles,” he said. A half-point cut may prompt a relief rally in stocks, he said, although it may also ensure that “the dollar will take one more tumble.” That could force the Fed to start raising rates later to defend the long-enfeebled currency.

“The Fed will have to walk a narrow walk and cut rates by a quarter-point,” Mr. Sri-Kumar said. He expects the rate cut to be accompanied by a statement adding up to a quarter-point’s worth of soothing words. It is likely to indicate that officials understand that “growth is more of a concern than inflation,” he said.

He cautioned that stocks’ course will also depend on how well banks perform as they struggle to quantify their exposure to bad debt and clear it from their books. “The subprime situation needs to get settled,” Mr. Sri-Kumar said. “Until this is resolved, a cut in rates alone won’t help the financial sector.”

Even if the losses are more extensive than feared, he said, the mere act of accounting for them may help financial stocks and the broad market. “If you are able to draw a line under your losses and say this is it, the reaction will be positive,” he said, “even if the institutions have substantial losses.”